First Time Home Buyer’s Guide

You might be ready to buy a home, but are you armed with the knowledge you need? Do you know about credit score requirements? Do you know which rate to choose fixed or variable? Do you know how much you can afford?

4. BUILD HEALTHY SAVINGS ACCOUNT

This is over and above your money for the down payment and closing. Your lender wants to see that you’re not living paycheque to paycheque. If you have three to five months’ worth of mortgage payments set aside, that makes you a much better mortgage candidate.

Fixed or Variable? How to protect your mortgage from higher interest rates.

On a $500,000 mortgage, each 1% interest rate increase means your ability to borrow is reduced by $50,000. And it’s looking likely that mortgage rates will rise maybe by one or two percent over the next few years, considering Canada’s lowest rates were here for the long time.

It doesn’t need to be that way. You can actually turn this pattern to your advantage with in-terest rate averaging. Interest rate averaging is the number one method used by multinational companies to manage their debt, although they call it ‘weighted average cost of capital’. Just because you’re not a major international business doesn’t mean you can’t get some of the same advantages when you manage your debt.

Averaging out your interest rates protects you from jumps in rates. It breaks your debt down into more manageable chunks, and you only need to deal with one or two chunks in an ave-rage year. With Canada’s fast-changing economy and volatile interest rates, this system prevents your properties from being at the mercy of the Bank of Canada announcements.

If you leave yourself at the brink of your servicing maximum, a sudden increase in interest rates can force you into a quick sale – the last thing any investor or homeowner wants to do. A higher cost of debt can create uncertainty and panic, not just for you, but for the whole market. Plus, you don’t want to have fixed rate for 5 years at 5.89%, as so many people did in 2008, only to see rates fall to 3.59% by mid 2009. Even in 2013, I’ve met the odd person coming off a high five-year fixed rate from 2008; that person has probably paid at least $50,000 in additional interest on that mortgage. You really don’t want to be that guy, do you?

It is possible to pay a penalty to get out of your fixed term, and in competitive conditions banks will pay for the appraisal and legal costs, but avoiding this problem is much better than having to negotiate your way out of it.

I still meet people who don’t know that they can split their mortgage even once, let alone six times. Theoretically, you could split your mortgage into an almost unlimited number of chunks, but I recommend five as a maximum.

Here’s how to do it:

Your portfolio: One big house

Treat all your properties as if they are one big house. Let’s say you have five properties:

» Your own house, worth $850,000 and with a $400,000 mortgage,

» A house in Ajax, worth $450,000 and with a $300,000 mortgage,

» A townhouse in Brampton, worth $360,000 and with a $110,000 mortgage,

» A condo in Ottawa, worth $320,000 and with a $150,000 mortgage, and,

» Another house in Hamilton, worth $480,000 and with a $150,000 mortgage.

Instead of trying to split these up individually and work out how to average the interest rates, just put it all together. Your portfolio is:

Property worth $2,460,000, with a $1,110,000 mortgage

Split it five ways

In order to average out your interest rates, you want to have a split that looks something like this:

20% of your mortgage fixed for one year.

20% of your mortgage fixed for two years.

20% of your mortgage fixed for three years.

20% of your mortgage fixed for five years.

20% of your mortgage on 5-year variable.

This means that around $222,000 in debt needs to be allocated to each category. Rather than splitting each loan five ways, you can make it simpler. You can split it like this:

»» Your own house: $400,000 mortgage, split into two chunks, one of $200,000, variable so you can pay in any additional income to reduce the mortgage, and one of $200,000 fixed for five years.

»» House in Ajax: $300,000 mortgage, split into two chunks, one of $200,000 fixed for three years, and one of $100,000 fixed for two years.

»» Townhouse in Brampton: $110,000 mortgage, split into two chunks, one of $55,000 fixed for two years and one of $55,000 fixed for one year.

»» Condo in Ottawa: $150,000 mortgage, all fixed for two years.

»» House in Hamilton: $150,000 mortgage, all fixed for one year.

Your totals are:

»» $200,000 5-year variable.

»» $200,000 fixed for five years.

»» $200,000 fixed for three years.

»» $305,000 fixed for two years.

»» $205,000 fixed for one year.

Make a decision on each mortgage chunk when the fixed term expires

Each year, your one-year fixed amount of money will need to be renewed or refinanced, or you can decide to go variable for a while. In most years there will also be one or two more chunks that need to be renewed or refinanced. But interest rate averaging means you only need to decide what to do with an average of $222,000 in debt at any one point.

Budget for the higher fees

Interest rate averaging does multiply your paperwork and may require some legal or appraisal fees, however, they will be easily offset by the savings that result from eliminating the effects of rising interest rates on your servicing.

How much money can this save you?

It’s impossible to predict exactly how much you can save using interest rate averaging. But here’s an example on the total debt of $1,110,000 if the interest rate increases by 2% in one year.

A Mortgage Secret for First-Time Home Buyers: It Can Pay To Buy More

It’s not easy to buy a first home, so here’s a suggestion that may be surprising: Instead of buying one residence, buy several. What I’m suggesting has nothing to do with late night infomercials or books that promise fast and easy wealth from real estate. Instead, many first-time buyers can benefit from an interesting quirk in the mortgage system.

It’s not easy to buy a first home, so here’s a suggestion that may be surprising: Instead of buying one residence, buy several.

What I’m suggesting has nothing to do with late night infomercials or books that promise fast and easy wealth from real estate. Instead, many first-time buyers can benefit from an interesting quirk in the mortgage system.

When you hear people talk about “real estate financing” they generally divide mortgages into two categories; loans for owner-occupied properties and more expensive and tougher loans for investors.

“Investment financing” is for buyers who do not physically reside at a property. “Owner-occupied” loans are for homes, the places where we stay at night, the phone rings and the car is parked.

But there’s a wrinkle:

Owner-occupant financing with little down and low rates is typically available for the purchase of more than a single-family house. Normally you can get owner-occupant financing for properties with one-to-four units as long as you use one as your prime residence.

In other words, your status as an owner-occupant allows you to buy more than just a house or condo. You can actually buy property that produces rent and increases your tax deductions.

When you buy properties with two-to-four units the world of real estate financing changes. Lenders will apply most of the rent to your income for qualification purposes.

This means you can borrow more — and also that you can offset loan costs with the rents such properties produce.

Suppose you buy a property with four units. You’ll live in one and rent the others. Each of the three rental units has a fair market rental of $1,000.

In this situation you’re likely to get two benefits. First, the lender will count some portion of the rent — say three-quarters — as income for you when determining your qualification standards. In other words, $2,250 a month will be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 75% = $2,250)

Why $2,250 and not the whole $3,000? Because the lender assumes you’ll have vacancies, repairs, insurance, taxes and other costs for the rental units.

For tax purposes, three-quarters of the property in this example will be “investment” real estate. When reporting your income taxes you’ll list your rents and costs for these units. One of these “costs” will be interest paid, an accounting device that will lower your taxes but take nothing in cash from your pocket.

Buying two-, three- and four-unit properties can make great sense, especially for first-time buyers. You’ll have “help” meeting monthly mortgage payments, especially in the first few years of ownership — the time that’s often the most difficult.

Later on, if you elect to move you can sell the property or you might choose to keep it and just rent out the unit had been your residence.

As with all investments, neither annual income nor rising property values can be guaranteed. Some owners may feel uncomfortable having tenants so close and there’s always the potential for insufficient rents, excess vacancies and big repairs.

Also, beware of going too far. While up to four units is okay, five units automatically classifies the property as “commercial” real estate under the guidelines for most loan programs, a title which means you cannot use owner-occupant financing even if you live on the property.

The good news, though, it that as an owner/occupant and also as a landlord you’ll learn a lot about the practicalities of real estate investing.

Real estate ownership requires ongoing maintenance and oversight. As an owner-occupant with a few units, you’ll learn “on the job” about making repairs, dealing with tenants, hiring contractors and maintaining property.

These are valuable lessons which can provide income and wealth over a lifetime. In fact, many people who’ve become successful in real estate often started with just one small property, owner-occupant financing with little down — and two to four units.

For details, speak with appropriate professionals. Mortgage Broker can tell you about available financing; real estate brokers can provide information regarding local rental patterns plus you’ll want a pro to explain the tax benefits of investment expences.

Refinancing Can Put Cash In Your Pocket 💰💰💰

One of the great benefits of refinancing your home is the ability to get cash in your pocket as a result of the transaction. There are several different factors to consider when selecting the best refinancing option for you.

If you are ready to pursue the option of a cash out refinance, make sure to research all your options before you making a final decision. Doing the proper research ahead of time can ensure that you won’t spend more than you need to on closing costs and other fees and help you avoid any last minute issues that might sneak up around closing time.

Conventional Refinance

A conventional refinance mortgage simply involves refinancing your existing loan to take advantage of lower interest rates. The end result is a lower monthly payment or a shorter term loan.

Cash Out Refinance

The only difference between a conventional refinance and a cash out refinance is that the amount of the new loan is greater than the balance of the original loan. The overage is cash that you are able to take out and use for other purposes.

People often pursue cash out refinances to get money to complete home improvement projects, pay off high interest debt (such as credit cards), or to make major purchases.

Second Mortgage

Another option for leveraging the equity in your home is to take out a second mortgage. With this option, you are not replacing your original mortgage loan with a new one. You are getting an additional home loan, which means you will have an additional monthly payment. This option is sometimes the best when your current mortgage is not up for renewal and you need money as soon as possible for the emergency situation. To get approved for second mortgage the lenders sometimes not require the income verification and the interest rate is based on the loan to value ratios. This option is also more expensive than the conventional or cash out refinance and the interest rate starts from 5.5%.

Making Your Decision

Before selecting a mortgage broker or loan program, there are several additional things to consider. Check references on the brokers you are considering working with. Ask prospective brokers for background information, such as how long they have been working in the industry, the number of loans they have closed, and the average interest rate.

Make sure your broker is asking you the right questions. A broker should ask questions about what you can afford, how much cash you need out of your refinance, and what type of interest rate you hope to get You want your broker to know what you can afford, and what you’re looking for. If a broker doesn’t try to find out this type of information from you, he or she may not be the best person to handle your lending needs.

Find out the full scope of mortgage loan products that are available to you. Some lenders or brokers will have a favourite product that they promote, but their first choice might not be your best option. Some brokers push mortgage products that result in higher commissions for them rather than matching clients with programs that are best for the clients. You can make a better decision when you know all of your options.

When it comes to buying money, which is what you are doing when you get a cash out refinance, it is very important that you know what you are getting into. The key to getting the best deal on a loan program that is right for you is to spend the time doing the research and asking the questions necessary to make sure that you are choosing the right broker and loan program for your particular situation.